Stocks Slightly Lower into Final Hour on Healthcare Reform Worries, Profit-Taking, More Shorting

BOTTOM LINE: The Portfolio is slightly higher into the final hour on gains in my Financial longs, Defense longs and Education longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is mildly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is about average. Investor anxiety is high. Today’s overall market action is neutral. The VIX is falling .08% and is high at 24.85. The ISE Sentiment Index is below average at 125.0 and the total put/call is around average at .78. Finally, the NYSE Arms has been running below average most of the day, hitting .34 at its intraday trough, and is currently .76. The Euro Financial Sector Credit Default Swap Index is falling 1.47% today to 65.25 basis points. This index is down from its record March 10th high of 208.75. The North American Investment Grade Credit Default Swap Index is rising .48% to 96.96 basis points. This index is also well below its Dec. 5^th record high of 285.99. The TED spread is falling 2 basis points to 19 basis points. The TED spread is now down 446 basis points since its all-time high of 463 basis points on October 10th. The 2-year swap spread is rising 3.01% to 32.19 basis points. The Libor-OIS spread is unch. at 12 basis points. The 10-year TIPS spread, a good gauge of inflation expectations, is down 1 basis point to 1.74%, which is down 93 basis points since July 7th. The 3-month T-Bill is yielding .12%, which is up 3 basis points today. The MS Cyclical Index is outperforming, rising .8%, despite the weaker consumer confidence reading. Education, Retail, Paper, Gold, Defense, Oil Tanker, Oil Service and Homebuilding shares are especially strong, rising .5%+ today. After the initial mild morning sell-off on the consumer confidence data, the bears have once again been unable to gain any meaningful traction. The Retail Index is actually .75% higher on the news. Oil continues to trade “heavy” and looks technically weak. Despite meaningful gains in most of Asia last night, the Shanghai Composite fell again and is near its recent lows. (IYR) has been a drag throughout the day today. As well, some profit-taking is going on in the tech sector after a big quarterly gain. Nikkei futures indicate an +35 open in Japan and DAX futures indicate an +6 open in Germany tomorrow. I expect US stocks to trade mixed-to-higher into the close from current levels on lower energy prices, less financial sector pessimism, investment manager performance anxiety and bargain-hunting.

Today's Headlines

Bloomberg:

- US stocks are probably in the early stages of an advance that will last three more years, according to Paul Desmond, president of Lowry Research Corp. He was named 2009’s best chart analyst by Technical Analyst magazine. Stock indexes in the U.S. reached “major bottoms” roughly every four years between 1962 and 2002, meaning the current rise will last another three years, said Desmond, whose firm recommended investors avoid stocks three months before the S&P 500’s peak in 2007. While some measures, including the percentage of shares trading above their 10-day average price, may suggest the U.S. stock market is “overbought,” such techniques don’t work early in bull markets, Desmond said. “The indicators have generally been useless in this period,” Desmond said. “The only time in history you see that pattern is in the early stages of a new uptrend.”

- Xerox Corp.’s plan to buy Affiliated Computer Services Inc. for about $6 billion may point to more acquisitions of consulting companies as hardware companies try to revive slumping sales.

- Home values in 20 U.S. cities climbed in July by the most in almost four years, helping stem the record plunge in household wealth that’s depressed spending. The S&P/Case-Shiller home-price index rose 1.2 percent in July from the prior month, the biggest gain since October 2005, the group said today in New York. Another report showed consumer confidence unexpectedly fell in September, while holding above the record low reached earlier this year.

- U.S. stocks are in a bull market and profits will increase as the economy rebounds, bringing down price-to-earnings ratios, Laszlo Birinyi said. “The bull market is intact,” Birinyi, the founder of Westport, Connecticut-based research and money-management firm Birinyi Associates Inc., said today in a Bloomberg Television interview. “The market is saying that the ‘E’ part of P/E may be a pleasant surprise. The market is forecasting that you’re going to have a better recovery than people think.” “Valuations, yes, you could say they’re stretched,” Birinyi said. “At the beginning of a bull market, all your measures and parameters get totally stretched. Yesterday’s resilience was one of the things you see in bull markets where the market takes it on the chin and comes back. That does not change our view.” Birinyi said on May 20 that the S&P 500 would climb to a record 1,700 in the next two or three years, a 60 percent gain from yesterday’s close. The index has rallied 18 percent since his forecast. Birinyi, who spent a decade on the trading desk at Salomon Brothers Inc. and is known for pioneering money-flow analysis, warned in October 2007 that a recovery in banks would be snuffed out as bad loans and lower revenue from underwriting damp earnings.

- Moody’s Investors Service changed the U.S. retail industry’s outlook to stable from negative, citing steady credit conditions for the next 12 to 18 months. Retailers successfully reduced costs in response to the weak consumer spending environment, Moody’s said today in a statement. Discount retailers, supermarkets and drug stores are demonstrating strength, Moody’s said. Pressure on department stores’ and specialty chains’ earnings will likely moderate, easing the impact on their credit, according to the statement.

- Mead Johnson Nutrition Co.(MJN), the maker of Enfamil baby formula, rose as much as 16 percent in New York trading after the Financial Times reported the company may receive a takeover bid from Groupe Danone SA. Mead Johnson, based in Glenview, Illinois, climbed $1.97, or 4.5 percent, to $45.32 at 12:45 a.m. in New York Stock Exchange composite trading.

- Government of Singapore Investment Corp.’s assets fell more than 20 percent in the year to March 31 as the collapse in financial markets drove down the value of its stake in UBS AG. GIC, manager of more than $100 billion of the city’s foreign reserves, said it continues to lose money on the holding in UBS, though it has made a profit on its investment in Citigroup Inc.

- Kinross Gold Corp., Canada’s third- largest producer of the precious metal, may increase output by about 57 percent in the next five years if it proceeds with projects under evaluation in South America. Proposed expansions at three producing mines and the possible development of three new projects may add about 1.3 million ounces of annual output, Chief Executive Officer Tye Burt, 52, said yesterday. Putting all six into production may cost about $3 billion, Burt said.

- The U.S. Federal Reserve proposed rules today that will end banks’ ability to apply credit-card payments to balances with the lowest interest rates first, implementing legislation Congress passed in May. The Fed also proposed that creditors obtain consumers’ consent before charging fees for transactions that exceed credit limits. Restrictions on lending to people under the age of 21 and subprime credit-card fees were also included, the Fed said in a statement.

Wall Street Journal:

- Democrats sought to give government the right to sell insurance in competition with private industry Tuesday as the Senate Finance Committee opened a second week of debate over massive health care legislation. "We need this option because the insurance companies have failed to meet their obligation" to the public, said Sen. Jay Rockefeller (D., W.Va.), accusing firms of putting profits over their customers. He said that without his proposal, consumers would face substantial premium increases once health-care legislation takes effect. Republicans countered that private companies would eventually be forced out of business and argued that millions would be forced to get their insurance from the government.

- Senate lawmakers Wednesday plan to unveil a blueprint for climate legislation that will mirror the House-passed bill in structure, but leave out many of the most important details. According to industry and government officials close to the matter, the legislation will outline a tougher near-term target for cutting greenhouse-gas emissions but won't include how valuable pollution credits will be distributed among affected industries.

- SPACs are back again. It is one of the strongest signs yet that deal activity has picked up and investors have regained an appetite for riskier bets. In recent days, a unit of New York investment bank Greenhill & Co. bought Iridium Satellite LLC, the satellite phone operator, for $680 million. And a fund sponsored by Texas investor Thomas Hicks purchased Resolute Natural Resources Co., a Denver-based oil and gas company, in a transaction valued at $582 million.

- Securities regulators are exploring new regulations for the multitrillion-dollar securities-lending market, the first major step regulators have taken in the area in decades. Securities and Exchange Commission Chairman Mary Schapiro said she wants to shine a light on the "opaque market." After many large investors lost millions in last year's credit crunch, she said, "we need to consider ways to enhance investor-oriented oversight." The SEC is holding a public round table Tuesday to explore several issues around securities lending, which has expanded into a big moneymaker for Wall Street firms and pension funds. Regulation hasn't kept pace, some industry participants contend. Securities lending is central to the practice of short selling, in which investors borrow shares and sell them in a bet that the price will decline. Short sellers later hope to buy back the shares at a lower price and return them to the securities lender, booking a profit. Lending and borrowing also help market makers keep stock trading functioning smoothly. The opacity of the securities-lending market worries regulators on several counts. The lack of transparency in the market has some people concerned that certain market participants could take on big risks that could threaten the financial system. Another issue is how securities lenders invest the cash collateral put up by borrowers. The lenders are typically large institutional investors such as pension plans and mutual funds. They work through agents that act as middlemen between lender and borrower. Last year's credit crunch exposed cases in which investors' agents placed collateral into risky pools of securities that had big losses. That spurred lawsuits by investors against agents. In some cases, the declines have been so severe that they undermined years of profits. The California Public Employees' Retirement System reported last month a loss of $634 million for its securities-lending program in the year ended in March. Wilshire Consulting said that figure could end up as high as $1 billion, wiping away much of the $1.4 billion that Calpers has earned from this since its inception more than 20 years ago.

- Sarah Palin may no longer be governor of Alaska, but she's certainly destined to become a best-selling author. HarperCollins, her publisher, has announced the print-run of her memoir will be a staggering 1.5 million copies -- equal to the print-run of Senator Ted Kennedy's posthumous autobiography published this month. Publishing sources tell me that such a giant run is only ordered up when there is clear evidence from booksellers and surveys of massive interest in a book. The book, which will be published on November 17, was a crash project.

MarketWatch.com:
- And the psychologically important 10,000 level is just 2.2% away. What are the chances that this level will be eclipsed soon? Quite good, according to a contrarian analysis of investment newsletter sentiment.

CNBC:

- Consumers will end up paying more money to banks if the numerous regulations proposed for the financial sector come to fruition, said Dick Bove, financial strategist for Rochdale Securities. "The one thing that the consumer can be absolutely certain of is that the cost of financial products — credit cards, home equity loans, mortgages — are going to go higher," Bove told CNBC.

NY Times:

- Would-be hedge fund managers who were forced to shelve their plans due to the financial crisis are beginning to test the waters again. Forbes notes that with new fund openings on the rise, 2009 may mark the first year since 2005 to see an increase in new hedge funds. Hedge Fund Research Inc. reported this month that the number of hedge fund liquidations declined in the second quarter. But, Forbes says, it also noted the second quarter saw an uptick in hedge fund launches from 148 in the first quarter to 182.

NYPost:
- Hedge-fund maestro John Paulson is tossing about a plan to save troubled lender CIT Group through a merger with IndyMac Federal Bank, according to people familiar with the situation.

Washington Post:

- The Obama administration is close to rolling out two initiatives aimed at addressing lingering problems from the financial crisis: A long-delayed effort to cleanse financial firms of their toxic assets, and a $35 billion plan to prop up state programs that help lower-income borrowers get affordable mortgages. Announcements on both fronts could be made as early as Wednesday. The toxic asset program is launching nearly a year after Congress approved the $700 billion financial rescue legislation that bore the name Troubled Assets Relief Program. The initiative was once envisioned as the signature program in the government's rescue of the banking system, but financial firms grew wary of the strings attached, and it was subsequently scaled back as the crisis abated.

- Defense Bill, Lauded by White House, Contains Billions in Earmarks.

Detroit Free Press:

- In case anyone doubted it, Detroit's vacant land problem, already bad, is getting worse in a hurry. The number of tax-delinquent properties listed for sale in Wayne County's annual auction beginning Oct. 19 has swelled to almost 9,000 this year, from about 2,000 properties in 2007, said Terrance Keith, Wayne County's deputy treasurer. The vast majority of those parcels are vacant lots in Detroit, he said, and most are unlikely to find buyers at the annual tax auction. Detroit already suffers more vacancy than any city in the nation, except perhaps post-Katrina New Orleans, urban planners and academic researchers said. An estimated 40 square miles of the city's 139 square miles of land are now vacant, an amount of land roughly the size of San Francisco or Boston.

Boston Globe:

- Foreclosures in Massachusetts fell sharply in August even as lenders launched more foreclosure proceedings against delinquent homeowners, according to a Boston firm that tracks local real estate activity.

Lloyd’s List:

- New orders at Chinese shipyards may drop 50% over the next five years because of merchant-fleet overcapacity and the state of the world economy, citing the China Assoc. of the National Shipbuilding Industry. The industry may show signs of recovery in 2012, particularly for specialist vessels such as ferries, offshore ships, car carriers and barges, the assoc. said.

Washington Times:

- Employee misconduct investigations, often involving workers accessing pornography from their government computers, grew sixfold last year inside the taxpayer-funded foundation that doles out billions of dollars of scientific research grants, according to budget documents and other records obtained by The Washington Times. The problems at the National Science Foundation (NSF) were so pervasive they swamped the agency's inspector general and forced the internal watchdog to cut back on its primary mission of investigating grant fraud and recovering misspent tax dollars. "To manage this dramatic increase without an increase in staff required us to significantly reduce our efforts to investigate grant fraud," the inspector general recently told Congress in a budget request. "We anticipate a significant decline in investigative recoveries and prosecutions in coming years as a direct result."

IATA:

- The International Air Transport Association (IATA) today announced international scheduled traffic results for August. Compared to August 2008, passenger demand was down 1.1%, (an improvement compared to the 2.9% decline in July), and freight demand fell by 9.6% (also an improvement compared to the 11.3% drop in July).

Rassmussen:

- Twenty-six percent (26%) of American workers now say their employers are laying people off. That’s down from 28% a month ago and 30% two months ago. It’s the lowest number reporting layoffs since last November.

- Fifty-one percent (51%) of U.S. voters say President Obama has not been aggressive enough in responding to Iran’s nuclear program. A new Rasmussen Reports national telephone survey finds that only four percent (4%) think the president has been too aggressive in dealing with Iran.

Politico:

- The public option limped out of August, battered and left to die in the Senate. But its supporters are working hard this week to bring it back, against the odds, with a series of high-profile votes in the Senate Finance Committee on Tuesday. Supporters don’t expect any of versions of the public option to survive the Finance Committee votes. But the exposure is a welcome breakthrough, supporters say, after critics impugned optional, government-run health care plans all summer. The key now is momentum, and backers are doing everything they can to convey confidence that President Barack Obama will eventually sign a health care bill into law that includes some sort of government coverage to compete with private insurers.

The Business Insider:

- How will the FDIC replenish its coffers without Sheila Bair suffering the indignity of groveling in front of Tim Geithner? Clever accounting. The plan is for the FDIC to require banks to pre-pay three years of assessments. As with everything else in the economy (cash for clunkers, the $8,000 homebuyer tax credit), the idea is to pull it forward. The FDIC gets the cash now, the banks take a hit -- but one that they can expense over three years, as Karl Dnninger points out -- and voila, free money.

Miami Herald:

- This year, New York's deep-pocketed rich were required to dig even deeper to help shore up state finances during the worst recession since the 1930s. They now pay higher taxes on their income and on limousines and yachts, more to enter a horse in a race and more to dabble in real estate. Meanwhile, many are losing millions from the closing of business tax loopholes and those making more than $1 million are losing tax deductions others get. It even costs more to hunt foxes or pheasants and have their taxes prepared. Now, a half-dozen states in this recession-driven movement are nervously eyeing New York to see if it's wise to demand so much from people rich enough to have a second home in less taxing states -- and for whom a change of address can be its own tax break. Early data from New York show the higher tax rates for the wealthy have yielded lower-than-expected state wealth. Gov. David Paterson, who had always warned targeting the rich could backfire, fears that's just what happened. Paterson said last week that revenues from the income tax increases and other taxes enacted in April are running about 20 percent less than anticipated. The concern about millionaire flight has prompted some states, including New York, New Jersey and California, to increase the highest tax rates only temporarily. For New York, it's the second temporary increase for high earners since 2001. ``People aren't wedded to a geographic place as they once were. It's a different world,'' said New York Lt. Gov. Richard Ravitch. So far this year, half of about $1 billion in expected revenue from New York's 100 richest taxpayers is missing. State officials say they don't know how much of the missing revenue is because any wealthy New Yorkers simply left. Real estate mogul Donald Trump told Fox News earlier this year that several of his millionaire friends were talking about leaving the state over the latest taxes. ``If anything, New York state has bailed out on us,'' he said. And it's not just the well-known leaving.

Reuters:
- China Investment Corp, the $200 billion sovereign fund, is set to pour a total of $2 billion into three U.S. distressed asset-focused funds, including one managed by Goldman Sachs (GS), sources said on Tuesday. CIC plans to invest around $600-$700 million each in three distressed asset investment funds, another managed by U.S. investment firm Oaktree Capital, said the sources briefed on CIC's plan.

- OPEC oil producer Angola expects to boost petroleum exports to "strategic partner" the United States, Angolan Foreign Minister Assuncao dos Anjos said on Tuesday. Crude oil exports from the African nation are set to increase from a current share accounting for as much as 11 percent of oil consumed in the United States, the minister told the Council on Foreign Relations think tank.

- Billionaire investor Wilbur Ross said on Tuesday he has teamed up with Starwood Capital Group to bid on the assets of failed Corus Bank in an auction run by the Federal Deposit Insurance Corp. The bids for the assets with a face value of roughly $5 billion were put in at noon on Sunday, said Ross, chairman and CEO of private equity firm WL Ross & Co, at the Reuters Restructuring Summit in New York.

- Google Inc's (GOOG) highly anticipated real-time communications service is not "ready for prime time," but the company said on Tuesday it was on track to begin the biggest field test yet of the potentially groundbreaking Google Wave. The Internet search leader intends to launch a limited preview of the service, already tested by developers and considered one of the company's most promising innovations as it seeks to widen its footprint among corporate clients. Experts say the project has the potential to advance Google's plans to provide software to corporations, as well as giving Google a bigger role in a social networking space now dominated by companies like Facebook and Twitter.

Financial Times:
- NRG Energy(NRG) is seeking a large-scale acquisition within the next 12 months and has Dynegy(DYN) in its crosshairs, two industry sources close to the situation told mergermarket. NRG is a Princeton, New Jersey-based power generation company.

- Eurozone economic confidence has rebounded to levels last seen a year ago – but the recovery shows further signs of losing momentum with important differences emerging among its 16 member states.

Interfax:

- Russia will equip all its military districts with Iskander missile systems, citing General Vladimir Boldyrev, head of Russian land forces.

Xinhua:

- China Jan.-Aug. gold output rose 15.5% to 200 tons.

Business Standard:

- NCR(NCR) today announced that it has secured an order for the sale of 3,800 ATMs, as well as a seven-year ATM services contract, from State Bank of India (SBI).

Bear Radar

Style Underperformer:
Large-Cap Growth (+.05%)

Sector Underperformers:
HMOs (-1.70%), Semis (-1.23%) and Road & Rail (-.70%)

Stocks Falling on Unusual Volume:
NTT, TKLC, NOK, SYNA, TKLC, AZZ and NLY

Stocks With Unusual Put Option Activity:
1) WAG 2) IVN 3) NKE 4) NOK 5) NLY

Bull Radar

Style Outperformer:
Mid-Cap Growth (+.01%)

Sector Outperformers:
Education (+1.20%), Homebuilders (+.89%) and Gaming (+.53%)

Stocks Rising on Unusual Volume:
GCI, WAG, MHP, BA, IAG, CVS, GR, ABT, PFE, MBT, ARCC, HBC, DDRX, CHBT, CVGW, NETL, EBIX, PRGO, WPRT, LAMR, GMCR, RAIL, SNDA, HITK, DWA, GOLD, PERY, ATHN, SINA, PODD, BRCM, CTRP, WNS, THO, ACS, BCA, CMG, MCO, AXR and GHL

Stocks With Unusual Call Option Activity:
1) DYN 2) CVS 3) BIIB 4) WAG 5) LO

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